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ETFs on the Move: Winners in the Down Market

by ETF Base on June 6, 2010

With the S&P500 losing over 3% on the week on a poor jobs report, further implosion of the Euro zone (check out country by country EU Austerity Measures) and the realization that the disaster in the Gulf is likely going to start to have long term implications outside the scope of whatever legal bills BP is served with, most of last week’s winning ETFs were short sector ETFs, leverage or tied to volatility. For the prior week, here are some top winners amongst the wreckage:

Non-Leveraged ETFs

UNG – US Natural Gas Fund – Up 12%– In a somewhat bizarre twist (to sideline bystanders), even though energy was down last week on global slowdown concerns, natural gas was up – big! This is what an endorsement from Obama does during a speech. As oil spews in the gulf, finally, the administration makes mention of the enormous natural gas deposits domestically that may help shift us away from importation of foreign oil (since there isn’t a heck of lot of promise in new offshore oil leases in the near future).

VXX -Volatility Index ETN – Up 10% – I’ve written about VXX somewhat routinely, especially in the context of investments that benefit from market volatility. In short, VXX rallies when market volatility (fear) is high. While holding VXX is not the best long-term investment because the long-term trend of volatility isn’t higher, but it makes for a nice hedge when it’s evident all hell is breaking loose. With the news out of Europe, the gulf, and now the middle east, it may not be a bad idea to hold at least some of the volatility ETFs out there to liquidate for bargain hunting later.

Leveraged ETFs:

DRV – Direxion Real Estate Bear 3x – Up 23% – Real estate has really become the most volatile sector both during and coming out of the recent financial meltdown. In prior market crashes, it was internet companies, tech, regional banks, and other sectors, but here, it’s been real estate. With the various government subsidies coming to an end like the homebuyer tax credit and still not much to show for it, investors are tiring of real estate prospects and seeking safety. This leveraged short ETF cleaned up last week even though real estate shares have been very strong out of the crisis.

FAZ – Direxion Financials Bear 3x – Up 17%– The Financials are next on the list of volatile components. While the solvency of the large institutions is no longer of great concern, the recent Financial Regulatory Reform hasn’t done much to help ensure an increase in margins for the banks. If looking to participate in a resurgence in investment companies but want to shy away from the large investment banks, consider MLP Investments. Master Limited Partnerships have some nuances worth watching related to tax treatment, but given the combination of tax efficiency, high yield and modest leverage, MLPs are one of the hidden gems oft-overlooked by retail investors.

ERY – Direxion Energy Bear 3x – Up 11% – Contrary to the rise we saw in natural gas for the week, energy shares as a whole have been dropping. Not only does the overall economic malaise not bode well for energy consumption, but now, the prospect of higher regulation (and costs) to extract oil is really driving many of these shares down. There are some ideas on pairs trades and value plays since entire sectors have been taken down in the wake of the BP disaster, but until it’s clear that the issue is resolved and the Euro situation is under control, there don’t appear to be any near-term catalysts for a rise in energy company shares.

Disclosure: Long VXX, Long DRV [both near term trades] and long/short positions in FAZ and ERY pairs trades.